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Beyond Balkanization

A proposal for utility regulatory and industry reform.

Fortnightly Magazine - April 2011

on direct synergies and complementary strategies resulting from two companies merging. But the societal benefits of more dramatic consolidation might vastly outweigh such micro-economic benefits. With a consolidated utility industry, the nation would save not only on utility administrative offices, but also could rationalize the many institutions that have sprung up to serve the wholesale marketplace.

For instance, if we had five energy utilities in the United States, would we need regional transmission organizations (RTO’s)? If so, how many? Would we need local reliability councils?

And even if we are underestimating merger savings, they’re probably the smaller part of the consumer benefits from industry consolidation. The real benefit of mergers would be the emergence of companies with the economic clout to make the investments the nation needs, and the operational scale necessary to create and implement the programs the nation needs to pursue.

Of course, the public would need assurances it’s protected from extremely large energy companies. “Big is bad” certainly resonates with many people. What type of assurances would the public accept? In the current environment, the typical answer is for a merged entity to enter into a treaty with regulators, under which the merging utilities promise to live up to relatively near-term rate and service standards. That sounds reasonable, except it doesn’t provide longer-term assurances.

The best approach to achieving longer-term assurances might be to give our regulatory bodies the ability to match firepower with firepower.

Instead of creating short-term merger barriers, governments should create regulatory staffs, equipped with adequate authority, to supervise large utilities, protect the public and work to address the energy challenges we face.

To do this, we need to recapitalize our nation’s regulatory staffs. Adequate resources aren’t common in state regulatory bodies today. The public expects a great deal from regulators, but the expectation is to be met largely with a firm eye on the budget. The downside of regulation on the cheap isn’t just that that regulators can’t always bring sufficient resources to bear on matters of substantial public importance. The bigger downside is that utility regulation isn’t viewed as a profession that highly talented and credentialed young people seek as a desirable career path.

This state of affairs isn’t the personal fault of any individual member of a regulatory staff. It’s the fault of a system that doesn’t see the benefit in investing in government institutions and doesn’t want to pay for thorough, in-depth analysis, identify broad solutions or work to create coherent programs that meet long-term needs.

Government as Expert

Many of my colleagues will say the last thing we need to do is invest in regulation, to hire more regulators. However, this view is short-sighted; we very much do need to reinvest in regulation.

For one thing, “expert regulator” is a far better role for government than “service provider.” Reinvesting in regulation is far better than the alternative—continuing the current trend of greater reliance on government to perform the role that businesses normally perform.

Instead, we need to build the resources of our regulatory bodies so they can perform the regulatory tasks